India debates raising taxes on the rich ahead of budget

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Last Updated: Thu, Jan 24, 2013 13:20 hrs

By Ross Colvin and Sumeet Chatterjee

NEW DELHI/MUMBAI (Reuters) - India should consider the argument for higher taxes on the "very rich", Finance Minister P. Chidambaram said in comments likely to fuel speculation about steps he may take in next month's budget to boost tax flows and narrow a yawning fiscal gap.

In an off-the-record pre-budget meeting with Chidambaram and Finance Ministry officials on January 7, some economists pressed for higher taxes on the rich to make sure they are paying their fair share, alarming business lobby groups that warn such a move would stifle growth.

The finance minister's comments come against the backdrop of a global debate, from the United States to France, about whether the very wealthy pay enough taxes.

The growth rate of Asia's third-largest economy is widely expected to slip to a decade-low in fiscal 2012/13 as the government grapples with ballooning budget and current account deficits and high inflation. Chidambaram wants to plug holes in the nation's finances by cutting expenditure and increasing revenues through improved tax collection.

"I think we should have stability in tax rates but we should consider the argument that very rich should be asked to pay a little more on some occasions, but that is not the view I am expressing. That is simply the argument I have heard and I am repeating," Chidambaram said in a TV interview aired on Thursday.

Chidambaram offered no definition of the "very rich", but his comments are likely to please many in his centre-left Congress party who feel recent reforms to further liberalise the economy favour corporate India at the expense of the common man.

The Congress party is facing a tough fight to hold on to power in a series of state elections this year and general elections due by May 2014.

"It is good electoral politics but economically doesn't make sense," said Venugopal Dhoot, who controls the diversified Videocon Group and ranks 38th in Forbes' India rich list with a net worth of $1.5 billion.

It was not immediately clear if Chidambaram was referring to higher taxes on income, assets or capital gains in a regime that currently makes India a good place for the rich to live.

At present the top income tax rate is 30 percent, which applies to earnings above 1 million rupees a year. There are just 35 million taxpayers in a country of 1.2 billion people, and of them about 1.5 million declare annual earnings of more than 1 million rupees, according to the Finance Ministry.

There is no inheritance tax, an issue Chidambaram raised as a concern after being appointed finance minister last August. In 2009, his predecessor withdrew a 10 percent surcharge on the 30-percent rate paid on earnings above 1 million rupees.

A government official with direct knowledge of the debate in the Finance Ministry said the focus is on plugging loopholes in the collection of income tax paid by individuals and companies.

"There are options of revisiting the inheritance tax and surcharge on income tax paid by the individuals," the official said, declining to say if these were firm proposals on the table for the budget to be unveiled around the end of February.

MILLIONAIRES AND BILLIONAIRES

"Even if they bring (back) the surcharge that will only add about 15-20 billion rupees, which is a drop in the ocean and will be lost in the decline of tax revenues that will arise due to lower compliance if tax rates are raised," said Surjit Bhalla, chairman of advisory firm Oxus Investments.

India's richest people tend to own businesses and other assets and thus have comparatively little exposure to salaries tax. Billionaire Mukesh Ambani, for example, was paid salary and perks of 150 million rupees in the last fiscal year by Reliance Industries, which he controls. According to Forbes, Ambani is worth $21 billion.

Similarly, Azim Premji, founder of India's No. 3 software exporter, Wipro Ltd , and India's third-richest person with a net worth of $1.2 billion, took home a salary and allowances of $84,696 in the last financial year, less than half of what the company's chief financial officer was paid.

Premji said at a gathering of business leaders in Davos, Switzerland, on Wednesday that in principle he was not against higher taxes for the wealthy.

A similar debate over taxing the well-heeled has played out recently in developed economies.

U.S. President Barack Obama made it a central theme in his re-election campaign and won a political victory over his Republican opponents in getting Congressional approval for tax hikes on households earning more than $450,000 a year.

And French Prime Minister Francois Hollande's plan to hike taxes on income over 1 million euros made headlines after French actor Gerard Depardieu said he would move abroad.

Raising taxes on the rich would not make a significant impact to the tax-to-GDP ratio as a large portion of the wealth remains outside the mainstream system and is invested in real estate and gold or finds its way to tax havens, they said.

India had 125,500 dollar millionaires in 2011, according to a Capgemini and RBC Wealth Management's world wealth report released last June.

(Additional reporting by Manoj Kumar, Arup Roychoudhury and Frank Jack Daniel in NEW DELHI and by Suvashree DeyChoudhury, Nandita Bose and Tony Munroe in MUMBAI; Editing by John Chalmers and Ron Popeski)